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41 in a short time (say, two or three years). If this were to happen, them the average (or long-run) price level could be sharply depressed for those initial years. Imperfect Competition Among Buyers. Many tobacco producers have long suspected that market price supports prevent the buying firms from exercising the market power which is theirs by virtue of their fewness. It is felt that, im the absence of supports, buyers would artificially depress prices. Imperfect competition among buyers might take a number of forms. First, the firms might engage in outright collusion and act as a unit. In the short run, especially in a single marketing season when supply is more fixed, such concerted action might well lead to sub- stantially lower prices than would competition among buyers.' S If however, the long-run tobacco supply function is very elastic, as our earlier analysis leads us to believe, persistence in such tactics would' result in output levels lower than those desired by the buyers. Such tactics would probably be unprofitable except' in isolated cases. They might, however, result in an increase in short run price variability. On the other hand, buying firms might follbw a price leader, perhaps different leaders for different kinds of tobacco. The results of such action probably would not differ significantly from the case of outright collusion. The market has generated some data which tend to refute the hypothesis that buyers would be able to collude and reduce prices in the absence of price supports. This hypothesis implies that market prices of tobacco would never rise above the support prices. As a matter of fact, the seasonal average prices for both burley and flue types have been substantially above the average support level im a number of instances. For individual government grades the differentials have at times been spectacular. Declining Land Values Restriction of burley and flue-cured production rights combined with supmort nrices eradualiv have eiven~ rise to higher tobacco orices. e te "This assumes that such aclion would not be challenged by the Justice ~ 1h Department's Antitrust Division.

42 the value of which has generally been capitalized into land prices.' Maier, et Ql. I ' employed regression models to estimate that one acre of flue-cured allotment was worth $2500 in 1957 in certain eastern North Carolina counties;, values in Piedmont North Carolina and Virginia counties were estimated to be around $1300 per acre. Seagraves and Manning analyzed why flue-cured allotment values have gradually increased over time." Thus, there is no reason to suspect that cunent flue-cured allotment values are any less (likely they are considerably higher). The same might be concluded for burley, the 1967 value of which was estimated (using regression techniques) to be $6015 per acre by Hoskins and Shuffett.' 9 Program abolishment would completely dissolve allotment values. The relevant question, however, is to what' extent would farmlan& values be lowered. Percentage estimates of the possible reductions in farmland values for North Carolina, Kentucky and selected counties in each state are presented in~Tables I and 2.20 A gross interpretation of these data is to conclude that program elimination ~ would decrease North Carolina's farmland value by 26.4 per cent-from aroun& 3.6 billion dollars-and, similarly, decrease Ken- tucky's farmland value 20.8 per cent-from around 2.9 billion dollars to 2.3 billion dollars. It is our opinion that these percentages may be on the low or conservative side. Yet, they should be used with caution. First, they may vary over time. In addition, they may not necessarily represent independent contributions to land values.2 t "The institution of lease-and-transfer of allotment programs has not separated land values from allotment values. Transfer programs, now operating, allow lease only withiro counties on a yearly basis. So, the basic value still lies within the lessor's land! This is discussed more fully by Dale M. Hoover in Lease and Transfer of Flue-Cured Tobacco Marketing Quota Among Farms for tlre 1966 and 1967 Crop Year. r' F. H. Maier, et aL, op.cit. "J. A. Sragraves and R. C. Manning, Flue-Cured Tobacco Allotment Value and Uncertainty 1934-1962, Economic Research Report No. 2, Department of Economics North Carolina State University, Raleigh, 1967. "D. Al. Shuffett and 1. Hoskins, op.cit. "Varying county rates for allotment values ware strictly a matter of judgment on our part, based on work by Hoover, op:cit., and Shuffett and Hoskins, op.cir. °1Multiple regression models employed by Maier, et aL, op.cit. and by SFiuffett and Hoskins, op.eit., atr always subject to spccification bias, i.e., upward bias of

43 prices.' 6 e acre of rn North Virginia raves and gradually r current siderably ( value of S per acre t values. farmland ctions in unties in program 26.4 per ise Ken, lollars to ty be ocaution. cessarily separated ow lease ithin the Transfer ind 196 ~lue v,rd' ment of ment on cir. Shuffett dbiasof Table 1. Estimates of Burley Tobacco Allotment Value as a Per- centage of Total Farmland Value, State of Kentucky and Selected Counties Area or County Total farmland valuea Tobacco allotmen: value as a percentage of total farmland val-je° ($1,000) (Percent). Kontucky 2,954,136 20.8 6racken, Mason and Robertson 79,613 23.5 Bourbon 76,497 50.9 Iladison 58,035 30.3' Fleming and Lcw•i's 104,478 18•3 Barren and Metcalfe 97,292 25.4 Green and Taylor 65,673 18.2 Adair and Casey 75,111 15.8 Daviess and Hancoek 114,864 10.2' aFor the state, Bourbon, and Madison Counties these values were cal- tulated from,farmliand value and acreage data contained in the 1954 lhlitcd States Census of Agriculture, Vol. 1, Part 30L Aentuckr.. ror other counties, farmland value data were obtained from the F:entuck+' Department' of Revenue and represent 196B'valvesB bT!oLacco allotment (burley) was valued at 53,000 per acre for the state and all counties except Bourbon and Madison, where values of $6,000 and $5,000, respectively, were used. For the state, Bour»n, and Madison Counties allotment data are for 196alcorresponding to the 1964 farmland census data. For other counties the data are for 1968. Obviously, land value decreases of anywhere near this magnitude would introduce chaos into the financial position of many farm owners-especially those with large farmland mortgage debts. Moreover, adverse effects would not stop at the farm gate. In many rural counties the property tax base could be severely eroded. Many land mortgage holders would; at the least, find themselves holding some "paper" of uncertain, recovery value. Finally, such~ adverse effects woul& most certainly spill over into the nonfarm economic sectors of these two the tobacco allotment value variable due to omissiom of some other relevant mariable. !t is doubtful that this happened in thesestudies. However, there.ras a large degree of correlation between the tobacco allotment value variablb and certain other vanables;,this coul& have distorted the allbtment value estimates to some extent. R l I -t

k 44 states and surrounding regions. An in-depth analysis (quantification) of each of these effects is beyond the purview of this paper. More informa- tion on these effects could be provided by an exhaustive (but costly from the research standpoint) economic-sector or input-output study. Perhaps existing input-output models for each tobacco producing state could be adapted by further delineating the agriculturall sector into tobacco, other-crop and livestock subsectors. Other Long-Run Effects There are a number of other agricult'ural variables which could change significantly in the event~ of program elimination. In this section we will comment briefly on changes for each of the following; tech- nology in production (especially the possibilities of mechanization elr masse), size(s) of tobacco operating units along, with dispersion of Table 2. Estimates of Flue-Cured Allotment Value as a Percentage of Total Farmland Value, State of North Carolina and Selected Counties Area or County Total farmland valuca Tobacco allotment value as a percentage of totaL farmland valuel' (51,000) (Percent) North Carolinac 3,624,194 26.4 Columbus 83,722 53.1 Wilson 91,916 50.9 Stokes 38,528 48.4 Warren 23,099 59.2 Wake 113,650 31.7 Durham 20,916 10,5 Randolph 41,OS5 6.5 aCalculated from farmland value and acreage data contained in the 190. United States Census of Agriculture, Vol. 11, Part 26, North Carolina. bTobacco allotment values were calculated by multiplying pounds of tobacco allotment (per area) by an allotment value per pound. Data on pounds of tobaccolallotncnt were obtained from the ASCS lnnual RC- pHt, \ortii Carolina, 1967, USDA. Data on allotment sale values per pound were a u, tcd from lease values determined b> Iloovcr b;' di'ciding his estirates of average Lease values per pound by a perpetuity factor of 12.5. See Da1c tt. Hoover, o,.eit. elncludcs both burley and flue-cured allotment. P h ] 9 t If 1 D

45 f ' acreage among individual farms, farm~income and resource adjustments, and possible production relocation. For the most part, empirical studies have not dealt directly with possible, expected changes in these variables. Consequently, what we have to say will be primarily our own initial hypotheses about the direction of possible changes. Technological Changes. No empirical studies are available which deal with this problemL It is our opinion that program elimination would not induce many perceptible changes in production technology, at least not initially. Of course, short-run profit incentives for individual ~ producers would be switched from maximizing returns to allotment n (pounds or acres) toward maximizing returns from the bundle of fixed i resources (land's resident labor, and investment capital). This implies ~ certain changes in existing, input ratios-probably toward~ less intensive f production techniques. Along this line, it seems reasonable to expect F increased incentive for adoption of mechanical harvesting and market preparatiom systems as they are perfected by engineers and become ~ economically feasible. Mechanization feasibility may be enhanced by shifts or relocations in tobacco producing areas (which we subsequently discuss). Size of Tobacco Operating Units. At least three factors appear to perceptibly influence the size(s) of individual production units: 1) potential cost economies of size, 2) the ease of acreage consolidation affected, in turn, by physical factors such as land topography and institutional factors such as production licenses (allotments), and 3) the sheer need for larger family disposable income affected. in turn, by a number of factors including tobacco market prices. The first two factors could come heavily into play if the program is terminated. One may argue that cost economies might be realized even with current control programs. Still, it should be realized that such economies, even. if available, cannot be realized unless barriers for entry or acreage consolidation are at least relaxed. Each of these two factors is discussed briefly and separately; the reader should realize that they act together in determining changes in sizes of operating units. Although there are no direct studies on economies of size. most surface evidence indicates that under presently available technology, the size of a burley operation-beyond~ enough acreage to accommodate one small curing barn-does not have any perceptible effect upon production cost. There may be some economies for larger producers 30-498: 0 - 78 -.4

I 46 who can buy chemicals and fertilizer in larger quantities; still, these savings are very small when expressed on an output (poundage) basis. This situation could change if mechanical harvesting and market- presentation systems, currently under development by engineers, became commereially feasible. Such systems may be adopted, it should be emphasized, for reasons other than achieving costs economies, e.g., ease of obtaining a labor crew. Consequently, burley producers may eventually, over time, adopt en masse such technology as mechanical harvesters, two-tiered curing barns and stripping machines, even in the face of what appears to be slightly larger unit costs. . Flue•cured producers, as opposed to burley, have for the past ten years steadily been adopting a number of mechanical harvesting and curing systems. Splinter reported on engineering developments in these systems and Bradford' reported that certain of these systems (viz., automatic stringing machines) offer possibilities for cost economies up to a capacity of 15 acres or so.22 These latter findings were corrobor, ated and extended into a much more exhaustive analysis conducted by Davis and Chappell.Z 3 Turning now to the problem of ease of allotment consolidation, there seems little reason to doubt that acreage allotments, strictly tied to the land, have deterred consolidation of burley acreage.2 ° The magnitude of this deterrence has not been estimated, but it is known that there has beemsome consolidation of management control through traditional share-rental arrangements. Recent work by Hoff has shown that in 1969 the average size of a tobacco management operation in Bourbon County, Kentucky was 5.47 acres (of tobacco), contrasted to °=See W: E. Splinter, "Engineering Developments in Harvesting and blarkeV Preparation Systems" in Tobacco Mechanization and Marketing. Agricultural Policy Series 29 N.C: State University, Raleigh, 1968, pp. 15-26, and G. L.. Bradford. "Effects of Changing Wages on the Profitability of Harvesting and Market Preparation Systems and on the Structure of Tobacco Farms," in Tobaccn Mechanization and Marketing„ 1968, pp. 1-14. ?'Bob Davis and J. S. Chappell, stlterttatire Tobacco Harvesting and Curing Systems for tlreNorth Carolina Coastal Plainr, Economic Information Report No. 12, Departmenrof Economics„N. C. Statc Universit'y„Raleigh, 1969: "Burley allotments prior to 1971, could be transferred among farms within the same county if the tracts of land has a common owner and if other provisions, such as cropland percentages, were met. Also, it is possible to transfer among owners if the lessor cash rents the entire farm of the lessee. This latter pro%ision has always been used to some extent. I I 1

ese ket- ers, ul& •g•1 ay ical the 47 an average allotment size of only 3.43 acres.' 5 In Metcalfe County, the Hoff survey showed the average size of a tobacco management opera- tion to be 2.04 acres, compared to an average allotment of only 1.37 acres. Apparently the incentive for consolidatiom does exist. Program elimination, it seems, might hasten the consolidation process-the extent of such change being something of a guess. The flue-cured lease and transfer program has been in constant operation since 1962. Since that year the amount of leasing activity has grown steadily from around three per cent of total acreage in 1962 to over 15 per cent in recent years? 6 Thus, there are definite indications that this program has helped enlarge the average size of flue-cured tobacco management unit. Hence, there is some question if program elimination, would contribute to muchi additional consolidation of flue- cured acreage per management unit. As subsequently discussed, there may be reason to expect geographic shifts in production, but this could take place without increasing the average size of flue-cured tobacco operating units. Farm Income and Resource Adjustments. In general, farm income of current tobacco produc~.ng areas would be lowered significantly by changing to a free market. One might contend, and'reasonablyso, that the program has created incentives for inefficient uses of existing farm resources. Even so, for the areas now producing tobacco, returns from "monopoly rights" to tobacco production probably have much more than offset inefficiencies attributable to the program. In the case of burley, this contention was corroborated in a regional study by Grise, et al,27 Their, rresults indicated that under a free market; net returns to land, resident labor and management for farms in current producing areas would decrease around 13 per cent, i.e., after taking into account alternative uses of land and labor resources. A study by Thompson and Davie28 showed income losses would be considerably less for larger farm operations in the western "See Chapter t1 of this book. "Dale M, Hoover, op:cit. "V. N. Grise, et at., op.cit. =a J. F. Thompson and J. R. Davie, Changing Burley Tobacco Allotrnents and Optrrmum Farm Programs in the Western Pennyroyal Area of Kentucky; Bulletin 707,, University of Kentucky Agricultural Experiment Station, Lexington, 1967.

48 Pennyroyal area of Kentucky; using linear programming analysis they~ ~ estimated the percentage drop to be only 3.7 per cent on~ a synthetic 450-acre farm, contrasted to a 15.9 per cent drop on the 125-acre farm ` in the same area. Unpublished work of the same nature by Collins, but ;, for a different geographic area (viz., farms located in the hills of Kentucky's Bluegrass area), indicates that farm income decline would be very pronounced. Thus, burley farm income declines would be expected to vary considerably among geographic areas, implying, varying resource adjustments would be needed:29 In the case of flue-cured tobacco, we do not know of any empiri- cal estimates of the degree of income loss which could occur as a result of program abolition. Our guess is that the reduction would be rather substantial. During the 1961-65 period, tobacco sales revenues contributed over 46 per cent of Norff Carolina's total cash receipts from all farm commodities, compared to around 41 per cent in Ken- tucky.30 In recent years both percentages have tended to decline slightly. However, it is extremely hard to reason that there exists any immediate alternative farm resource uses which would allow net farm income to recover rapidly in either state, or even in several other southern states heavily involved in tobacco production. Production Relocation. Employing a spatial eqµilibrium linear programming model, Grise concluded' that burley tobacco would bee produced in alli (current) producing regions even if auction-level prices were as low as 42 cents.31 Their analysis also showed that at this equilibrium price, the relative distribution of acreage would not be markedly different from the pattern which now exists.32 Even though they did not consider geographic areas of the U.S. cu:.rently not pro- ' !n geographic areas where few alternative profitable on-farm~ activities exist, such as the Bluegrass Hills, off-farm employment could be the only realistic income substitution possibility. s'blost of the 46 per cent contribution to total cash receipts was from flue-cured sales while in Kentucky the 41 per cent contribution was from~ burley sales. Figurcs taken from Unitcd States Department of Agriculture, Consumer, and Markeung Service. Annual Reports on Tobacco Statistics, Statistical Bulletins no. 356 and 435, Washington, 1964 and, 1968. s' V: N. Grise, et al.,,op.cit: "Their results did indicate some relative shifts away from Kentucky's Bluegrass areas to south-central and, eastern Kentucky and the valleys of eastern Tennessee, western Virginia and North Carolina. These changes were not sharp enough to be considered "marked"'

49 ~sis they nthetic re farm ins, but ills of would uld be plying empird- a result e rather evenues receipts in Ken- decline ists any et farm il other ducing burley, it seems extremely doubtful if potential producers in any of these outside areas would frnd~ it feasible to engage in burley production under free-market conditions 33 In general, empirical studies of possible shifts in geograplucal distribution in flue-cured production have been conducted only on an indirect basis. Bradford and' Toussaint34, in connection with studying the effects of across-county allotment transfer, concluded that pro- ducers in eastern North Carolina and the coastal plains of South Carolina generally reape& higher profits from tobacco production than producers in the Piedmont areas of North Carolina. Based on this an3lysis they predicted a shift in acreage to these coastal areas if across-county transfer was legalized. Subsequent work conducted by Hoover35 and by Efstratoglou an& Hoover36 generally corroborated this conclusion.37 However, none of these studies provided an empiri- cal estimate of the magnitude of location shifts which might be expected4f the tobacco program were abolished.38 Conclusions Now that burley tobacco producers have approved a new program of poundage quotas and transferable allotments the chances of sudden program abolition appear to have lessened considerably. Still', in future years old crises may resurface andJor new crises may emerge which could lead to abrupt program abolition by the Congress or by pro- ''Produeers in these outside areas simply would not be able to compete efficiently given their, inexperience with the technology, their lack of favorable weather and soil conditions and, most important, their lack of a market. "'G. L. Bradford and W. D. Toussaint, Economic Effects of Transferable Tobacco Allotments, Agricultural Economics Information Series No. 89, Department of Economics, N.C. State University, Raleigh„1962. " ' Dale M. Hoover, op.cit. 36 Sophia Efstratoglou and Dale M. Hoover, Variability in Rerital Rates Paid in the Flue-Cured Tobacco Rental dlarkets in Selected North Cvrolina Counties, Economic Research Report No. 12, Department of Economics, N.C. State Univer- tity, Raleigh,19T0. "Simil2r to burley, perhaps even more so, there is little reason (not.vithstanding our lack of empirical studies) to suspect that potential producers in geographic areas outside current flue-cured producing areas would find it feasible to engage in produotion under free-market conditions. "17tis„of course, was not an objective of these studies.

50! ducers. ln this paper we have presented some ideas about the economic effects of a sudden program termination. In~general, we concluded that burley and flue-cured market prices would decrease by an average equal to the annual allotment value-currently, this would be around 20 to 25 cents per pound. Secondly, farmland values woul& be expected to drop rather sharply-the exact magnitude currently was estimated to be tion and upon farm income and resource-utilization changes. program termination upon production relocation, allotment consolida- North Carolina's farmland value. Finally, we discussed the effects of around 20 per cent of Kentucky's farniland value and 26 per cent of f~~